The term bad debt is used to describe a debt that cannot be recovered. In other words, it is a debt that is unlikely to be paid by the debtor due to their financial situation, bankruptcy, or unwillingness to pay. When a company determines that a debt is bad, they will remove it from their accounts receivable and record it as a loss in their income statement. This helps to reflect the true financial position of the company and also reduces the amount of taxable income.